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February 12, 2015

AGREEMENT. Ceasefire. Pull-back of heavy weapons. Autonomy talks. OSCE. Does Poroshenko mean it? Can he deliver? Will Washington let him? What happens if there's a “nazi spring” in Kiev? Or in Galicia? The Donbass wants out. Will the WMSM stop its propaganda? (If Putin is so determined to conquer Ukraine why has he twice signed an agreement by which the Donbass stays there?). There's no provision for vigorous enforcement. The Debaltsevo pocket isn't cleared. It's too much like the last agreement when Kiev forces never pulled back and never stopped shelling. At best, a first small step; at worst, a pause so Kiev can try again (here's Poroshenko explaining they used the last pause to re-arm).

ECONOMY. We have official numbers for 2014. GDP was up 0.6%, the January-November trade balance was US$176 billion, up 0.6%; industrial production up 1.7%. On the bad side, the consumer price index rose 7.8% while real disposable income fell 1%. Capital flight (so-called) was US$151.5 billion but 85% of that was actually debt repayment (see below). The RUB/USD exchange worsened from 33 to 56. Oil prices are creeping up gradually. Hardly Obama's “economy in tatters”.

December 05, 2014

Chris Weafer, an esteemed, long-term financial analyst in Moscow gives his summary of Russia's economic situation at this stage of the standoff between the U.S., its European allies and Russia. Chris has remained totally neutral in his analysis over the years, is not involved with the Kremlin and has been a boon to American and European investors over the years.

Chris Weafer

Senior Partner

Macro-Advisory Ltd

Moscow

December 4, 2014

We have today issued a special report looking at the political aspects – both geo-political and domestic – of the crisis. We address such questions such as “what are the political drivers of the crisis?”,“will Russia back down or continue to live with sanctions indefinitely?” “Does the crisis risk altering the domestic political balance?”, “what are President Putin’s key geo-political and domestic priorities?”, “how does Russian legislation work?”

Today starts a sequence of important events – five important Thursdays in a row – which will serve to clarify the Kremlin's list of priorities and also what we may expect in terms of investment reforms and risks in 2015. Today President Putin delivered his annual address to the Federal Assembly (State of the Nation address).Nothing new or exceptional (see December macro Monthly to be issued in the coming days). Next Thursday (11 December) the Central Bank holds its last policy meeting of the year and is expected to clarify its ruble policy – if not forced to do so before then. On Thursday 18 December Putin holds his annual televised press conference and will answer questions from the audience and the public. Here also we usually get greater clarity on priorities and policy. That is the same day as the next EU Leaders Summit in Brussels, at which we should hear more comments about sanctions, etc. The followingThursday is 25 December and the fifth Thursday is New Year's Day. Rumors of Cabinet changes are already emerging in Moscow as the period between the Western Christmas and New Year is when such events tend to happen most often.

SPEECH. Putin is making his annual speech to parliament today. Again I encourage you all to read what he actually says rather than selections twisted to fit propaganda requirements in the MSM. English. “The agreement between Ukraine and the European Union has been signed and ratified, but the implementation of the provisions regarding trade and economy has been postponed until the end of next year. Doesn’t this mean that we were the ones who were actually right?” Well, doesn’t it?

May 28, 2014

A good hockey player plays where the puck is. A great hockey player plays where the puck will be”

Wayne Gretzky

Petro Poroshenko’s first priority will be to suppress the para-military groups in East Ukraine. His second priority is to establish economic pragmatism with Moscow. The Kremlin is open to such an approach but has stipulated that it is closely monitoring the actions against the pro-Russia separatists in the East. This may yet be a deal breaker which would keep investment risk high in both countries. The worse the TV pictures from the East and the longer they last, the greater the pressure on markets in both countries.

There are conflicting messages about a possible EU brokered gas deal. It is still very possible that a deal will be struck by the weekend (very positive for all sides and for Gazprom’s cash flows) but threats are still being exchanged against a tense political backdrop. As we have noted previously, a gas deal (or not) will provide the clearest signal of the hoped for pragmatic relationship between Russia and Ukraine and the start of an improvement in Moscow’s relations with the EU.

We expect Ukraine to pay down $2 bln of the debt up-front and another $500 mln in June and Gazprom to revise its price to the European average (or close to it) which is currently $380 p/1’000 cm. Naftogaz is reported to be still unhappy with the terms (probably on the volume off-take) but the EU is pushing Kiev to reach a deal. That may be ahead of this weekend’s deadline or in the coming weeks. Kiev has received $3.2 bln from the IMF, plus has raised $1 bln via the US loan guarantee and is expecting at least $1 bln from the EU shortly. It has enough to cover Gazprom plus other scheduled debt obligations.

April 16, 2014

“Let me warn you, if you start chasing after views, you’ll be left without bread and without views”

Nikolai Gogol

Weekend headlines will add to market nervousness today. The headlines from east Ukraine over the weekend will unsettle markets at the start of trading today. The situation is clearly very dangerous and largely unpredictable. But, despite the ratcheting-up of rhetoric from all sides, the evidence still suggests that Russia will not invade. Instead Russia has always supported the protestors’ demands for some form of federalism in the east.

Sanctions risk if the West blames Moscow. The key risk is whether the US/EU believes Moscow is behind the escalation of violence in the east and, even without a military incursion, moves to the more serious economy and trade disrupting sanctions. This question will be the focus of investor attention over the coming days.

Diplomatic efforts were starting to pick-up. As the crisis escalates on the ground, the foreign ministers from Russia, Ukraine and the US/EU are due to meet for the first time in Geneva on Thursday to discuss the crisis. That is the same day President Putin is scheduled to hold his annual televised Q&A session and Ukraine and the economy are expected to dominate. If that planed meeting is cancelled this would be taken as a very negative signal by investors and we would see a further step down in equities, the ruble, and in debt markets.

How the gas dispute proceeds will provide a good indicator. Based on that critical assumption, i.e. no military action and no increase in sanctions against Russia that such a move would certainly provoke, investors need to follow the gas dispute closely. What happens here will provide the best indicator of whether political pragmatism is emerging as the backdrop to the headline crisis or whether the dispute either remains deadlocked or could be deteriorating. In the case of the former, long-only investors should start buying into selected equities and sovereign debt while, in the case of the latter, they should continue to stand-off.

January 27, 2014

Disclaimer: although released first in 2011, the trend set described in this report, continued to gain prominence among Russia's population.

Pew Research Global Attitudes Project

Confidence in Democracy and Capitalism Wanes in Former Soviet Union

Twenty Years Later

Two decades after the Soviet Union’s collapse, Russians, Ukrainians, and Lithuanians are unhappy with the direction of their countries and disillusioned with the state of their politics. Enthusiasm for democracy and capitalism has waned considerably over the past 20 years, and most believe the changes that have taken place since 1991 have had a negative impact on public morality, law and order, and standards of living.

There is a widespread perception that political and business elites have enjoyed the spoils of the last two decades, while average citizens have been left behind. Still, people in these three former Soviet republics have not turned their backs on democratic values; indeed, they embrace key features of democracy, such as a fair judiciary and free media. However, they do not believe their countries have fully developed these institutions.

In contrast to today’s grim mood, optimism was relatively high in the spring of 1991, when the Times Mirror Center surveyed Russia, Ukraine and Lithuania. At that time all three were still part of the decaying USSR (which formally dissolved on December 25, 1991). Then, solid majorities in all three republics approved of moving to a multiparty democracy. Now, just 35% of Ukrainians and only about half in Russia and Lithuania approve of the switch to a multiparty system.

As was the case two decades ago, the shift towards democracy tends to be more popular among those who are perhaps best positioned to take advantage of the opportunities provided by an open society. In all three countries, young people, the well-educated and urban dwellers express the most support for their country’s move to a multiparty system.

Two main talking points. Okay, it’s a cheesy title but nevertheless appropriate. The two big talking points concerning Russia right now are the Ukraine deal and the presidential pardon for Mikhail Khodorkovsky. We know the basic facts about both but not the terms, the small print. Specifically what has, if anything, President Yanakovich agreed to in exchange for the Russian money and what are the terms of Khodorkovsky’s pardon? At yesterday’s press conference Khodorkovsky spoke of an “unspoken understanding” about what he is going to do in the future, which includes staying away from politics. Speculation about the specifics of both deals will continue to preoccupy Russia watchers for many months of 2014. The fact that President Putin was negotiating with German officials and Khodorkovsky even as law enforcement agencies were preparing a third case is also intriguing. But that’s for another day.

No immediate impact. Neither event has any short or medium term implication for the stock market, currency or the domestic economy.

May Gazprom get equity in the Ukraine pipe? Without wishing to add further to the plethora of speculation, one issue to watch for concerns Gazprom’s long standing ambition to own an equity stake in the Ukraine transit pipe. Recall that this was eventually part of the deal for cheap gas to Belarus. The point about this is that it would be much easier and cheaper to upgrade that pipe and plug it into the Balkan’s South Stream network than to build the Black Sea transit pipe. It would also satisfy President Putin’s demand that state companies cut spending and, perhaps, allow Gazprom to boost the dividend.

December 22, 2013

Former Russian Finance Minister Aleksei Kudrin’s star is on the rise – but where to? He was recently appointed to President Vladimir Putin’s Economic Council and held a major conference of opposition-oriented NGOs under the auspices of his Civic Forum in central Moscow. As such he retains a foot in both the state and opposition camps, either of which can be a platform for his political future.

Kudrin has an impressive record - a rarity for a Russian politician. He has gotten things done – important things. As President Vladimir Putin’s finance minister from May 2000 to September 2011 he put Russia on a sound financial and monetary footing as Russia recovered from its 1998 default. He eliminated Russia’s Soviet era debt, maintained balanced budgets, and established and nourished for a decade Russia’s Stabilization Fund – a rainy day account of reserve money which helped Russia whether the more recent economic downturn and lackluster ‘recovery’. Consequently, in 2010 he was named as Euromoney’s ‘finance minister of the year.’

In September 2011 he resigned from then Prime Minister Putin’s government, claiming he disagreed with planned increases in defense-related spending. However, his resignation came in the wake of Putin’s announcement that he and not then President Dmitry Medvedev would run for the Russian presidency in 2012. He also said later that he was tired of government “half-measures and the absence of political will.”

Newsflow from Kiev is changing almost by the hour but one factor has become clear; President Yanakovich’s previous hope of striking a deal with both Brussels and Moscow has all but gone. The resilience of the protestors in Kiev and the pressure coming from both the EU and Russia means that he is fast being forced into making a choice between east or west. There is no longer any possibility of playing one off against the other and the time remaining to make a choice is running out.

There is also increasing speculation of pressure on Yanakovich from within his support group and the oligarchs. To make some political concessions, e.g. to agree to a one term limit or to call fresh Rada elections, as a way to diffuse the current tensions. The argument being that in such an event both the EU and Russia would back off and wait to see how the situation developed. Purely speculative of course as there is no current evidence that Yanakovich is thinking of yielding any power. Even if that were to happen, Ukraine would still need to work a financial aid deal with the EU/IMF or Russia within months. Muddling through is only an option with a very short shelf-life. Perhaps until the spring, but almost certainly not into the summer without debt re-scheduling.

December 04, 2013

The following is Part 1 of a two-part examination of just how much Russia has or has not changed since Putin’s arrival to the presidency in 2000. Part 2 will look at domestic and foreign politics and therefore will be more qualitative in its analysis.

PART 1: Economic and Social Development Under Putin

Part 1 looks at Russian society and the economy and will rely mostly on quantitative comparisons of then and now.

The Economy: Non-Structural Change

Many of the more raw economic indicators, despite some of them being less significant in terms of reflecting on broad-based economic effectiveness, are impressive and cannot be negated entirely by the less impressive indicators. For example, Russia GDP reached an all time high of 2014.8 billion US dollars in December 2012 compared with 195.9 as of December 1999, averaging 741.3 billion US dollars from 1989 through 2012 US dollars). Per capita GDP was a mere $1,399 in current US dollars compared to $14,307 in 2012 (http://data.worldbank.org/indicator/NY.GDP.PCAP.CD). As is apparent, GDP growth took off as of Putin’s arrival to power from a very low point, however, as a result of the very low starting point it began from given the 1998 default. In 1999 it rose to 6.4 percent and in 2000 to a peak of 10 percent. However, GDP growth has been declining for several years. By 2012 it had declined to 3.4 percent with an official Russian estimate of GDP growth for this year of 1.8 percent (http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG). So Russia has made some good use of its commodity-export economy.

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